‘We had no idea we were doing private debt’

Marcin Leja of CVI tells PDI how a firm viewed as a pioneer of private debt in Central and Eastern Europe came into the asset class almost by accident.

Marcin Leja

How did CVI come about?

The company started in 2011 as an investor in the Polish corporate bonds public market. There was limited liquidity so we would buy the bonds and end up holding them to maturity. Therefore, somewhat naturally we moved into private transactions with the goal to collect a premium for an illiquid market, which was anyway pretty illiquid on the public side. At first, we had no idea that what we had been doing was called private debt.

A few years later, we went to a conference in London and learned that there was already a well-established asset class called private debt where GPs perform similar private deals as we do. Yet there are some differences. For instance, we do not have a proper GP/LP structure, and our investors are primarily affluent and high-net-worth individuals. We use the affluent money for lower-risk strategies (direct lending) and the HNW money for higher-risk (junior/mezzanine).

Tell us about your strategy?

In Western Europe, 90 percent of deals are sponsored while in Central and Eastern Europe 90 percent are sponsorless. Tickets are smaller as companies are smaller. For us, it translates to ticket sizes of between €2 million and €25 million. We tend to be also much more diversified. In our direct lending strategy, we have around 150 investments in the portfolio which gives us nice protection as one or two failures do not influence the returns significantly. We also have almost 60 investments in our higher-risk strategy.

What is the competitive environment like currently?

Poland, our biggest market, resembles Germany where local banks are very active but very traditional and risk averse. That leaves plenty of space for alternative finance providers which are much more flexible. There is no point competing with banks in the senior space and we tend to focus on situations where bank financing is not available for risk, timing or structuring reasons. Still, we can also act as a junior partner to banks in combined debt structures.

There used to be two or three funds competing in the mezzanine space and focusing on sponsored deals but mezzanine is not widely used by private equity investors anymore. In our mezzanine product we tend to be rather yield oriented than focusing on the equity part. That makes our financing much simpler.

Do you expect the competitive environment to remain the same?

I would be surprised if the situation remained the same for several more years as GPs need to look for new geographies and more will come to Eastern Europe. There is so much raised capital chasing the same transactions in Western Europe. My guess is that GPs will target larger deals to start with but the number of large deals is limited and they will eventually look at smaller ones as well. But there are barriers to entry. You need to have local know-how and local relationships to find the right opportunities and know what to do in a workout situation.

What do you think about political risk in CEE?

I like to think political risk is distinct from the economic situation. The Prime Minister of Poland, Mateusz Morawiecki, is an ex CEO of one of the largest banks [Bank Zachodni WBK, Santander Group] and he is a kind of safety buffer. We have good relations with local public institutions, for example we have co-invested with the [state-owned] Polish Development Fund. Furthermore, we recently signed an agreement with the European Investment Fund to provide €200 million in guarantees for our portfolio. That is an additional layer of protection for our returns.